Denmark’s financial watchdog has launched an investigation into market-rate pensions provision and the associated risk transfer to scheme members that has occurred since the products gained prevalence.
The Danish Financial Supervisory Authority (FSA) said the study would examine the payout process and how companies managed investment risk – and whether this newer pension model was of benefit to its customers.
Carsten Brogaard, Danish FSA deputy director, said: “The payout process in market-rate schemes can be very different from the traditional guaranteed pension schemes.
“Payments cannot be expected to be stable, and for some products payments may vary significantly in size over the payout period. We must have a better overall overview of this.”
In recent years, Danish pension providers favoured market-rate pension products – which are linked directly to financial market performance – over the traditional average-rate products that smooth returns from year to year, and sometimes include a yield guarantee.
In some cases companies have switched customers to market-rate products automatically, and in other cases clients have been given a choice.
The FSA said the reason for the “theme survey” was that the risk in market-rate products, previously carried by companies, has been transferred to individual pension savers who must bear any losses on the investments.
The regulator said it would focus particularly on the decisions taken by pension companies’ supervisory boards on the payout process.
Linked to this, it said it would investigate the stability of pension payouts and how this was included in the risk management of the product – including the extent to which stabilisation and smoothing mechanisms were used.
The FSA said it expected to publish its conclusions later this year.
This is not the first time the Danish FSA has honed in on market-rate pensions. In early 2017, it released a paper scrutinising, among other things, consumer risk in the market-rate model.